Natural gas at two-week low on estimates for supply rise

SAN FRANCISCO (MarketWatch) -- Crude-oil futures closed lower Tuesday, with market expectations for higher U.S. crude inventories pulling prices further away from two-month highs they reached in the previous session.

"The oil markets are taking a deep breath of profits before what may be a headlong dive into another bull run," trader Kevin Kerr said, adding that he thinks prices could reach $70 a barrel.

"The supply numbers this week will be the key catalyst," said Kerr, editor of Global Resources Trader, a newsletter published by MarketWatch, the publisher of this report.

Crude for May delivery closed at $66.23, down 51 cents. On Monday, the contract struck a high of $67.90 a barrel, its loftiest since Feb. 1, before pulling back late in the day.

In petroleum products, May unleaded gasoline tacked on 3.23 cents to close at $1.8955 a gallon, while May heating oil lost 0.64 cent to finish at $1.8558 a gallon.

The Energy Department and the American Petroleum Institute will release separate reports on petroleum supplies Wednesday morning, covering the week ended March 31.

Analysts at IFR Markets expect to see an increase of 1 million to 3 million barrels for crude supplies, while Fimat analysts predict a rise of 260,000 barrels. An analyst survey conducted by Platts calls for an increase of 1 million, on average.

Inventories of crude stood at nearly 341 million barrels for the week ended March 24, their highest level since April 1999, the Energy Department reported last week.

Motor gasoline supplies were likely unchanged or up by 1 million barrels, IFR said. Fimat expects a 1.1 million-barrel decline, while Platts' survey points to a 1.5 million-barrel drawdown.

Distillates, which include heating oil and jet fuel, likely fell between 500,000 barrels and 1.5 million barrels, IFR said. They were likely down 3.4 million, according to Fimat, while the Platts' survey pegged the size of last week's decrease at 1.7 million barrels.

Gasoline spotlight

"All the concern is really starting to focus on unleaded and as April whittles away and we approach the summer driving months, all bets are off," said Kerr.

Indeed, Kerr's expecting gasoline to rise to $3 a gallon at the pump and sees a risk of $6 to $7 gasoline this summer. The key factors affecting prices will be hurricanes, new ethanol requirements and developments in the Middle East.

"All of that combined with higher summer demand mean any pullback is a buying opportunity," he said.

Prices at the retail level for regular unleaded gas have been climbing, with the average price per gallon last at $2.59, nearly 31 cents higher than a month ago and 19% above the year-ago level, according to AAA's Daily Fuel Gauge Report.

In the latest developments from the Middle East, Iran's foreign minister vowed that Tehran will push ahead with its controversial nuclear-research program, even after the United Nations Security Council called on it to suspend uranium enrichment, Agence France-Presse reported.

Manouchehr Mottaki condemned Iran's referral to the Security Council as a ""political decision which, unfortunately, shows that the logic of domination has taken the upper hand over reason."

As quoted by AFP, the minister said: "There are two paths available to us: that of understanding, cooperation, dialog and work within the framework of the International Atomic Energy Agency and that of confrontation. The Islamic republic prefers the former."

Venezuela calls

It's also important to keep an eye on Venezuela, analysts said Tuesday.

BBC News reported late Monday that Venezuelan President Hugo Chavez will ask the Organization of the Petroleum Exporting Countries to set $50 as the long-term level for oil.

Venezuela will host OPEC's next meeting in June.

"We're trying to find an equilibrium. The price of oil could remain at the low level of $50. That's a fair price it's not a high price," the BBC quoted Chavez as saying.

Analysis by the U.S. Energy Department shows that at $50 per barrel, Venezuela -- not Saudi Arabia -- will have the biggest oil reserves in OPEC, according to the BBC.

The BBC report explained that Venezuela has vast deposits of extra-heavy oil that hasn't been counted because it would have been too expensive to exploit, but at $50, melting them into liquid petroleum would become extremely profitable.

Chavez is basically "asking to re-establish a price band, which was his baby to begin with, and make $50 a floor for oil," said Phil Flynn, a senior analyst at Alaron Trading. That, in turn, would be bullish for oil prices.

"Venezuela is a potentially a more dangerous situation to U.S. oil supplies" than Iran, said Flynn, given "Chavez's obvious dislike for the Bush Administration."

"Chavez is working to get foreign oil companies out of the country -- we're already seeing ExxonMobil
XOM, -1.29%
pull out of some operations," he said.

Natural gas falls

Elsewhere in the energy complex Tuesday, natural-gas prices closed at their lowest level in two weeks with some traders betting that a government report due Thursday will show a climb in natural-gas supplies.

Natural gas for May delivery shed 17.9 cents to close at $7.065 per million British thermal units following a two-week low of $6.97. The contract climbed as high as $7.63 on Monday, a one-week high.

Analysts at IFR Markets expect the Energy Department on Thursday to report an increase in natural-gas stocks of 10 billion to 20 billion cubic feet for the week ended March 31. That would mark the first increase of the season.

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